The summit has undoubtedly reduced concerns about politically triggered yen appreciation to an extent.
We now expect US fiscal and monetary policy expectations to firm up downside support for USD/JPY in the near term. Fed Chair Yellen is set to testify before the Upper and Lower Houses on Tuesday and Wednesday this week. Markets are likely to look for clues about whether the next rate hike will come in March or June. However, while US economic momentum continues to trend upward, the biggest accelerating factor will be fiscal policy. We think Yellen will avoid giving a clear signal on the next hike at this point, while maintaining the possibility of three hikes this year.
We see firmer near-term downside support for USD/JPY within the 110-115 range, shifting to 115-120 within 3-6 months as US fiscal and monetary policy advances. If the full range of promised fiscal policies is introduced over the next 1-2 years we would see this as consistent with a USD/JPY of 120-125, but this range would be highly sensitive to political developments. The Japanese government could verbally intervene to slow yen depreciation if USD/JPY showed signs of breaking above 115-120.
...We continue to recommend building long positions via buying on the dips - strategically at near 110 and tactically at over -115 level.
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